7/01/2010 @ 11:40AM

Why Small Coal-Fired Plants are Going Away

By December two coal-powered plants 30 miles southeast of Chicago that have been pumping out electricity for 55 years will be shut down. The plants work fine, but their owner,
Edison International
, agreed to close them as part of a broad agreement with Illinois designed to comply with tightening federal emission standards.

These plants are among dozens of small and midsize coal plants nationwide that will likely be shut down over the next several years. The back-and-forth in Washington for months has been all about carbon dioxide, whether and how to price it. But clean air regulations already in place, affecting pollutants like sulfur dioxide and nitrogen oxides, are becoming strict enough to beat carbon taxes to the punch.

Hugh Wynne, an analyst at Bernstein Research, estimates that the tougher regulations could, over the next several years, cut the nation’s annual coal-fired power production by 14%, or 290 billion kilowatt-hours. That’s $15 billion worth of electricity. Natural gas, which emits 45% less carbon dioxide than coal, would take up most of the slack. Because coal power is cheaper than natural gas power, the switch will jack up your utility bills.

Investors have rendered their verdict. Edison’s generating subsidiary, which has 10 gigawatts of capacity among its 44 unregulated plants and wind projects, has zero valuation: The parent company’s $11 billion market value is the same as what its regulated utility operation would be worth on its own, says Wynne.

Edison conceivably could add scrubbers to the plants, but at a puny 155 megawatts each they are too small to support the cost. Wynne says coal plants 200 megawatts and smaller, which account for 22% of the nation’s coal capacity, will likely not be able to afford upgrades. He estimates that a sulfur dioxide scrubber costs 36 cents a watt, or $360 million, for a 1-gigawatt plant, but $1.14 a watt for a 50-megawatt plant. For $1.14 a watt you can buy a spanking new gas-fired plant.

The rules are likely to get tougher still under President Obama’s Environmental Protection Agency. Regulations that set up a trading plan for pollutants, first issued under the George W. Bush Administration, were challenged in court as too soft. The industry expects Obama’s new ones, due shortly, to be far more stringent. Others are expected soon that will tighten caps on toxic metals like mercury, acid gases and particulate matter.

Other power producers facing the same issues as Edison include
Ameren
,
Dynegy
, NRG Energy,
Mirant
and RRI Energy, the last two of which have announced plans to merge. A host of regulated utilities will also likely have to close plants, but their earnings may escape damage if they can convince public utilities commissions to let them charge ratepayers for scrubbers or new plants.

Theodore Craver, Edison’s chief executive, holds out hope that his subsidiary can gain value if natural gas prices rise or some new cheap scrubbing technology appears. “The worst it can be is zero,” he says. “So there’s upside here.”